Relative Deprivation and the Housing Market
Cornell economist Robert Frank argues in a new book (reviewed here by Daniel Gross) that Americans are more concerned in keeping up with the Joneses than in absolute wealth. He finds, for example, that “When asked whether they’d rather have a 4,000-square-foot house in a neighborhood of 6,000-square-foot McMansions, or a 3,000-square-foot home in a zone of 2,000-square-foot bungalows, most people opt to lord it over their neighbors.”
George Mason economist Alex Tabarrok puts this to the test, using Northern Virginia as a case study, to see whether people actually behaved this way. They decidedly do not.
Houses in neighborhoods with high average prices sell for more than similar houses in neighborhoods with lower average prices. Thus the prima facie evidence is that the same house is worth more if it is surrounded by more expensive houses – the opposite of Frank’s hypothesis.
[H]ouses with bigger lots sell for more (the positive coefficient on lotsqft) but the increase in price is less when your lot size is bigger than the average lot size. In other words, people do not want to own the biggest house in the neighborhood.
What about when your house is smaller than average? Here there is no penalty. Contra Frank, people do not mind having a small house in a neighborhood of McMansions.
That’s consistent with not only my own experience but the time-honored rule of real estate investment of “buy the smallest house in the best neighborhood you can afford.” Certainly, I’d much rather have a mediocre house in a gorgeous community than the exact same house in a slum.
As an aside, when did a 2000 square foot house get to be considered a small bungalow? Usually, bungalows are less than 1000 square feet. And, unless one has ten children, a 3000 square foot house is quite large. Or has moving to a major metropolitan area skewed my real estate perceptions?